In the Meltzer history of the Fed, there is an invisible (or rather hidden) hand account of LBJ's economists being (deliberately?) left ignorant of  expenditure plans.

RL  

----- Original Message -----
From: "Brad Bateman" <[log in to unmask]>
To: [log in to unmask]
Sent: Thursday, August 18, 2011 8:08:50 AM
Subject: Re: [SHOE] functional finance

Dear Bruce, 

No, I do not think I protest too much. I did not say that the Keynesian working on the CEA predicted stagflation if Johnson ramped up war spending without cutting spending elsewhere or further raising taxes. All I said was that they were not responsible for advocating that he undertake the additional war spending without some compensating cuts elsewhere or additional taxes. In other words, the Keynesians in the CEA were not responsible for recommending the policy that was pursued. They learned about it only after it had been announced publicly. 

My own recollection is that they were warning about inflation, not stagflation. I don't think you are wrong about that. But you have missed the more narrow point that I was trying to make. 

By the way, everything I am claiming is richly supported in the archives and is now well established in the secondary literature. 

Thanks, 

Brad 
Bradley W. Bateman
Office of the Provost
Denison University
Granville, Ohio 43023 

Office: 740 587 6243
Fax: 740 587 5790 
On 8/18/2011 8:13 AM, Bruce Caldwell wrote: 

Brad, 
Methinks you protest too much. If my memory serves me correctly (and more on this in a moment), the doctrine I was taught as an undergraduate in the early 1970s was that there was a stable tradeoff between inflation and unemployment. The Keynesian advisers to LBJ were presumably warning him that running deficits at full employment would lead to higher inflation, not stagflation. This is why there was an income tax surcharge passed in the late 1960s, which did not work to tamp down demand because it was viewed as temporary. In any event, none of the advisers believed that stagflation would be the consequence of the policies. This was why Friedman went from pariah to prescient in a matter of a few years in the eyes of the profession. Of course from an Austrian view the episode underscores the difficulty in trying to fine tune or otherwise control something as complex as an economy. 
All this is if memory serves correctly. At a conference at Duke this year questions were raised about whether this rather standard narrative was true. Was it really believed by policy advisers, and was it really in the textbooks, that there was a stable tradeoff between inflation and unemployment? Or was this a construction after the fact? This presumably is a question on which documentary evidence in policy memos and textbooks exists and which warrants investigation. We all know memories can be unreliable. 
Bruce 
  
On 8/17/2011 10:18 AM, Brad Bateman wrote: 

Robert, 

In your compacted narrative it is very difficult to tell where (or if) you are trying to establish causality and if so between whom and what. Indeed, it is difficult to understand what volition and actions you are attributing to whom. Because I cannot fully ascertain what you are trying to say, I speak with caution, but I likewise suggest caution to you in trying to construct your large scale "narrative". 

First of all, if you are attributing the stagflation of the 1970s to "the Keynesian network", please be cautious. The Keynesian economists who worked for Lyndon Johnson in the Council of Economic Advisers explicitly cautioned against escalating the war in Viet Nam while he was simultaneously running the War on Poverty. His decision to escalate the war in Viet Nam without cutting spending more or raising taxes more was not the idea of "the Keynesian network". (Of course, all this assumes that fiscal policy, and not the oil embargoes, was the cause of the stagflation, an interpretation with which not not everyone agrees. Likewise, the club of "the Keynesian network" that you want to use in your narrative was not a monolith.) But please be clear that the best Keynesian minds working for Johnson certainly did not recommend the fiscal policies to which you seem to attribute the later stagflation; in fact, they cautioned against the likely consequences those policies. 

I also caution you about generalizing about the history of the Mont Pelerin Society. The historian Ben Jackson has shown that in its early years many prominent members advocated "Keynesian" full employment policies. ("At the Origins of Neo-Liberalism: The Free Economy and the Strong State, 1930-1947" The Historical Journal , Volume 53, Issue 01, March 2010, pp 129-151.) 

Brad 
Bradley W. Bateman
Office of the Provost
Denison University
Granville, Ohio 43023 

Office: 740 587 6243
Fax: 740 587 5790 
On 8/16/2011 2:24 PM, Robert Leeson wrote: 

Two books (the General Theory and the Road to Serfdom) and two clubs (the Mont Pelerin Society and the Keynesian network) broke economists up into hostile camps. The consequences of dysfunctional discretion (stagflation) completed the process. Why was Hayek selling the Keynesian aggregate circular flow model to the US?  Presumably, he was displaying an open-mindedness to novel stabilisation proposals (including the analysis of inflationary expectations) before the rift became ossified.  (Hayek's correpondence with McCord Wright and Meade is instructive). 

Phillips immediately began to develop rules-based policy recommendations based on the Machine: rules that were designed to eliminate the type of discretion which Mont Pelerin Society members like Arthur Burns were pushed into exploiting to ignite the worst inflation since the 1920s. 

To call this the "Mont Pelerin Society Stagflation" is as helpful as calling it the "Keynesian Phillips Curve Stagflation."  Such rhetoric distracts attention from the cause of financial crises: intermediary discretion.  

RL    

----- Original Message -----
From: "Bruce Caldwell" <[log in to unmask]> To: [log in to unmask] Sent: Tuesday, August 16, 2011 4:44:16 AM
Subject: Re: [SHOE] functional finance

I didn't bite because I think that Hayek just thought that the machine 
was cool for representing the circular flow. That doesn't have any 
necessary connection with either the Phillips Curve or any policy 
implications that people may later have drawn from the curve.
Bruce

  On 8/16/2011 12:13 AM, Robert Leeson wrote: 

Since noone took my Tooke bait: Hayek and Lerner were US sales agents for the Phillips Machine.

RL

----- Original Message -----
From: "Robert Leeson" <[log in to unmask]> To: [log in to unmask] Sent: Monday, August 15, 2011 9:51:05 AM
Subject: Re: [SHOE] functional finance

Distinction taken.  Did the "rules party" directly engage Lerner on this issue?

A follow-up question: Keynesian economics is an _indirect_ attempt to tackle the central malfunction of capitalism - the discretion allocated to intermediaries to sever the arterial flow of savings into capital expenditure.  The Phillips engineering framework implicitly provides a _direct_ re-engineering solution which makes functional finance (and the Paradox of Thrift, deficit-financed expenditure ...) redundant. Preliminary speculation: this may be why Hayek appeared to be so enthusiastic about Phillips' work.

RL

----- Original Message -----
From: "David C. Colander" <[log in to unmask]> To: [log in to unmask] Sent: Monday, August 15, 2011 5:26:09 AM
Subject: Re: [SHOE] functional finance

I will.

The idea of Functional Finance was that government should take the actual consequences of the fiscal decisions into account rather than to simply have a blanket rule to never run a deficit. That makes good sense then and now. If deficits cause problems that the model does not take into account, functional finance rules would have to adjusted to take those effects into account. As I discuss in “Functional Finance, New Classical Economics, and Great Great Grandsons” (in Edward Nell and Mat Forstater (editors) Reinventing Functional Finance Edward Elgar, 2003) when inflation became a problem in a way separate from the way Lerner's simple model had assumed, then the rules of functional finance had to be changed to take account of that. The same holds true if debt has consequences separate from those assumed in the model. So the problem is not with the idea of functional finance--choose policy on the basis of its consequences--the problem is with the unthinking way it has bee


n applied.  It is not functional finance that has led to dysfunctional deficits, it is the unthinking (or political) application of it.


Dave

David Colander
CAJ Distinguished Professor of Economics
Department of Economics
Middlebury College
Middlebury, Vermont, 05753
(802-443-5302)

-----Original Message-----
From: Societies for the History of Economics [ mailto:[log in to unmask] ] On Behalf Of Robert Leeson
Sent: Sunday, August 14, 2011 9:37 PM
To: [log in to unmask] Subject: [SHOE] functional finance

Has anyone (or will anyone) defend Abba Lerner against the charge that "functional finance" has led to dysfunctional deficits?

Robert Leeson 

-- 
Bruce Caldwell
Research Professor of Economics
Director, Center for the History of Political Economy

"To discover a reference has often taken hours of labour, to fail to discover one has often taken days." Edwin Cannan, on editing  Smith's Wealth of Nations

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